BOE Splits as Posen, Miles Push for Larger Stimulus Incre

Mervyn King, governor of the Bank of England, speaks during the bank's quarterly inflation report news conference at the Bank of England in London, U.K., on Wednesday, Feb. 15, 2012. Photographer: Chris Ratcliffe/Bloomberg

Feb. 22 (Bloomberg) -- Bank of England policy makers Adam
Posen and David Miles were defeated in their bid to raise
stimulus by 75 billion pounds ($118 billion) as the majority
argued such a move might provoke alarm on the economy.

Seven of the nine-member Monetary Policy Committee,
including Governor Mervyn King, voted to raise the asset-purchase target by 50 billion pounds to 325 billion pounds,
according to minutes of the Feb. 8-9 meeting published today in
London. They argued a larger increase “risked sending a signal
that the committee thought the economic situation was weaker
than it was.”

“Recent data on the domestic and international economies
had on balance been more positive than might have been
anticipated towards the end of 2011, pointing to the possibility
that growth might be stronger than expected in the near term,”
the majority argued, according to the minutes.

The pound fell against the dollar after the report and was
trading at $1.5717 at 10:31 a.m. in London, down 0.4 percent on
the day. Gilts advanced, pushing the yield on the 10-year bond
down 5 basis points to 2.17 percent.

Posen and Miles called for 75 billion pounds of additional
quantitative easing because of “the considerable margin of
spare capacity remaining in the economy and the extent of
deleveraging still likely to be required,” the minutes showed.
They saw a risk of a “prolonged period of depressed demand
causing inflation to fall materially below” the central bank’s
2 percent target.

‘Door Open’

“This leaves the door open for more QE,” said Victoria
Cadman, an economist at Investec Securities in London. “We’re
looking for another 50 billion pounds in May, and after that we
don’t see any more as the economy picks up in the second half.”

The Bank of England expanded its asset-purchase program
this month after the economy shrank in the fourth quarter amid a
squeeze on consumers and Europe’s debt turmoil. The MPC said
today that while growth will be “volatile” in the near term,
it expects the pace of expansion to “strengthen gradually”
from later this year. The panel was unanimous on keeping the
benchmark interest rate at a record-low 0.5 percent.

The minutes also reveal that for some policy makers, the
probability of inflation exceeding the target was “slightly
higher than shown in the projection” in the central bank’s
Inflation Report last week. Those members said a “case could be
made for maintaining the stance of policy at this meeting.”

Slowing Inflation

In the Feb. 15 report, the central bank forecast that
inflation, which fell from a peak of 5.2 percent in September to
3.6 percent in January, will slow to its goal by the end of this
year and reach 1.8 percent in two years.

In the minutes, the central bank said inflation is likely
to continued to ease in the coming months, though the “speed
and extent of the fall remained uncertain.”

The MPC saw upside risks to inflation from potential
disruptions of oil supplies from tensions in the Middle East and
companies raising prices to recover margins. It noted downside
risks from demand growth being too weak to absorb the spare
capacity in the economy “sufficiently.”

Data to be published Feb. 24 will probably confirm the
economy shrank 0.2 percent in the fourth quarter, according to
the median estimate of 36 economists in a Bloomberg News survey.
Still, recent surveys indicate the economy may strengthen in the
current quarter. U.K. manufacturing returned to growth in
January, while expansion in the services sector accelerated.